Zinc Treatment Fees May Decline 20% on Lower Spot Charges, Macquarie Says

Dec. 21 -- World zinc mining companies may pay 15 to 20 percent less to smelters for processing raw material into refined metal next year after fees dropped in the cash market, according to Macquarie Group Ltd.

“Assuming a basis zinc price of $2,000 a metric ton, we could see a base treatment charge of about $200-$210 a dry metric ton,” the bank said in a report today. This would be a reduction of about $40-$50 a ton from this year’s benchmark of $253 a ton on a basis price of $2,000 a ton, the bank said.

Mining companies, including Teck Resources Ltd., and smelters, such as Korea Zinc Co. and Mitsui Mining & Smelting Co., are negotiating fees for next year. Producers seek lower fees when raw material, or so-called concentrate, is in short supply. Zinc is used to galvanize steel.

The current differential between spot and benchmark terms is about $125 to $145 a ton, the bank said. The benchmark fees “will fall sharply in 2011, given the current differential between spot and benchmark terms,” it said.

Treatment charges are the fees paid by miners to smelters for processing concentrates to produce metal and are payable per dry metric ton of zinc concentrate processed.

Miners normally pay a premium above spot market terms to secure reliable customers for their concentrate. The “three- digit differential would be very generous,” the bank said.

Escalator Cut

Zinc for three-month delivery advanced 0.8 percent to $2,293.50 a ton on the London Metal Exchange at 4:56 p.m. Tokyo time. Refined zinc production gained to 1.1 million tons in October, exceeding demand of 1.036 million tons, the International Lead and Zinc Study Group said Dec. 15. Output in September was 1.095 million tons against demand of 1.07 million tons, according to the report.

The fees also have “price participation” clauses allowing smelters to benefit from rising prices. An escalator is a percentage increase in the base treatment charge for each dollar gain in the LME zinc price above the basis price.

Mining companies may push for a further cut in so-called escalators and de-escalators with the 2011 benchmark, the bank said. This year’s price participation was already reduced to the narrowest range in at least 20 years, it said.